NBN a $20.3 Billion White Elephant… and Counting

In truth, we never liked it from the start.

We didn’t like the politics of it.

We didn’t like the economics of it.

And most of all, we didn’t (and still don’t) see the need for the government to get involved in running an internet infrastructure service.

Back in April 2011, we wrote this in Money Morning about the National Broadband Network (NBN):

Who’s to say the NBN won’t have cost taxpayers $100 billion, $400 billion or even $1 trillion by the time it’s finished?

That was based on estimates the NBN would cost around $43 billion. We didn’t believe that any public sector agency would be able to connect 10 million Aussie homes for anywhere near that.

Turns out, we may be right. As the Age reports:

‘[NBN] received $7.1 billion from the federal government during the 2015-16 year, and has spent $20.3 billion since being launched in 2009.

Mr Rue said the company still has access to $9.2 billion of government funding, which is enough to get through the 2016-17 financial year.

To summarise, NBN Co has already spent $20.3 billion since 2009. And just how many homes are connected to the NBN? Just 1.1 million.

To put that in perspective, each connection so far, has cost NBN Co $18,454. That’s one expensive internet connection. And how much are households paying for the service? [Cough] They’re paying an average of $43 per month.

If we valued each connection as we would a ‘company’, it means connection costs are priced at a price-to-earnings (PE) ratio of 35-times.

Speaking of which, surely it’s not all outgoings for NBN Co? It’s bringing in some money, right? We’re afraid that ‘some’ is an appropriate word.

Again, according to the Age:

Government-owned telecommunications company NBN Co now has over one million customers and has doubled its revenue to $421 million for the past financial year.

OK, so far so good. Go on…

However, it also reported a $2.4 billion loss as it spent far more operating its network than it received from customers.

[Raspberry]

Wait, there’s more…

Next year NBN Co expects to report a much bigger loss. It is forecasting revenues of just $900 million as it spreads its network out to 5.4 million households. It is forecasting slow take-up rates of only one million customers to a total of 2.1 million active customers in mid-2017.

We would issue forth another raspberry, if we had the inclination.

But aside from this being expected of a public sector body, the reality is that economically, the NBN was doomed from the start.

That’s because the NBN roll-out was always a sop to those mythical ‘bush’ dwellers…where the locals wear Akubra’s and Drizabone’s 24/7, know of no other vehicle than a Ford or Holden ute, and call each other ‘cobber’ and ‘mate’ so frequently that they’re like some poor soul with Tourette’s Syndrome.

If a private, profit-oriented business were running the NBN roll-out, it would seek to maximise as much revenue as possible. That would mean rolling out the network in areas with the densest population: inner cities, then inner suburbs, then outer suburbs, then regional cities and towns, and then, finally, the ‘bush’.

Unfortunately, a combination of ‘vote buying’ and demands from rural areas (who always seem to want city luxuries and services while living rurally), meant that the lowest density areas have gotten the NBN first.

It’s only something that a non-profit-oriented organisation could think of. Let’s look at a map of most of Victoria. The purple area on the map shows where the NBN is currently available.


Source: nbnco.com.au
Click to open new window

To the ignorant, you’d think that coverage area was impressive. But once you know that over 70% of the population lives within the red circled area, it’s clear the coverage map isn’t as impressive as it looks.

It’s the same elsewhere. The Gold Coast has virtually no NBN coverage, despite a population of around 600,000 people.

But don’t worry. The area in Queensland north-to-south from Yandilla down to Bringalily, and east-to-west from Milmerran Downs to Punchs Creek has almost complete NBN coverage. That is, despite the map showing the area to be almost completely rural…as in fields. See the map below:


Source: nbnco.com.au
Click to open new window

Amusingly, the one part of this coverage area, which appears to have high population density, is the part without NBN coverage!


Source: nbnco.com.au
Click to open new window

The word ‘boondoggle’ springs to mind.

The upshot is, this is why we’ve never liked the NBN from the start. The politics and economics were both bad.

But not only that, but since the NBN began its existence in 2009, another big development in the world has taken hold — the huge growth in wi-fi and smartphones.

In 2009, smartphones were in their infancy. The iPad hadn’t yet been released, or even thought of. Along with the increase in video streaming and social media content, folks are much more mobile with their computer devices.

This had led to an increase in the ‘cord cutter’ phenomenon. That means many folks are moving into houses, whether they’re buyers or renters, and forgoing a fixed line connection.

Instead, they’re using mobile data plans, or downloading video and other content at work, or other communal areas, such as cafes.

The bottom line is that the NBN was a bad idea then, and it’s a bad idea now. I said back in 2011 that the NBN could cost $100 billion or more. Looking at how the rollout has progressed so far, it looks as though that will be a gross underestimate.

Cheers,

Kris Sayce,
Publisher, Money Morning

Editor’s note: The above article is an edited extract from Port Phillip Insider.

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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